Already under investor pressure to deliver higher returns and free cash flow, most oil and gas companies are in a “wait-and-see” mode, sticking to lower spending and drilling programs in place as they await price rebounds and higher oil demand, analysts said on a recent webinar.

A couple, however, have already made moves.

“Everybody has come out and said that if a prolonged period of low prices exists, they will take that into consideration and they will decrease activity,” Sar Ozkan, director of energy analytics and crude market efforts for Enverus, said on a joint webinar with RS Energy Group on March 5. “They’re not afraid to decline. That’s just the world that we live in now—where free cash flow is king.”

An oil price rebound and higher oil demand remained elusive on March 9 as the market endured one of its worst days in recent history.

Continued fears about the coronavirus and demand uncertainty added to a growing list of challenges for U.S. shale players that include improving finances, focusing on environmental, social and governance (ESG) issues and producing within cash flow. Further complicating matters was a collapsed deal between OPEC and its allies, with Saudi Arabia and Russia pledging to increase production despite weak global demand.

Crude futures fell about 20% on March 9. A barrel of WTI crude was trading at about $32 just before 2 p.m. CST.

Recent commodity price volatility led Permian Basin shale players Diamondback Energy Inc. and Parsley Energy Inc. to scale back drilling.

Diamondback said March 9 it will cut its nine completion crews to six and drop two drilling rigs in April and another later in the second quarter. The company also plans to further reduce its capital budget for the year.

“While this decision is expected to result in lower 2020 oil production than originally forecast, we will maintain positive cash flow and protect our balance sheet and dividend,” Diamondback CEO Travis Stice said in a news release. “We have made these decisions before and they are driven by the goal of protecting shareholder returns over the long term.”

Parsley revised its baseline capital budget assumption from a $50 WTI oil price to between $30 and $35 WTI for the rest of the year. The company, which is now targeting at least $85 million of free cash flow—down from at least $200 million—is planning to drop its operated rig count by three to 12 and on March 6 dropped its five frac spreads to three.

“There’s no specific guidance on where capex and production will ultimately shake out given limited visibility into the duration and magnitude of pricing weakness to come,” Tudor, Pickering, Holt & Co. said of Diamondback’s announcement in a note to clients, “but less oil growth than originally targeted will be more than offset by balance sheet and dividend protection if the company maintains positive cash flow as planned. Looking for other coverage companies to follow suit.”

More To Come?

While Diamondback and Parsley were the first two to announce changes, others have already put the writing on the wall, looking at oil demand and the impact of COVID-19.

“Exxon [is] actually going to be taking their expected [production] growth number for the last two years down 10% just because [it is] not happy with the prices … in the market although they are keeping their longer-term plan of almost tripling production in the Permian Basin intact,” Ozkan said. “We saw Centennial saying that [it’s] going to be prioritizing balance sheet preservation over production growth. We saw Continental saying that with demand impacts on the coronavirus, [it’s] going to be moderating near-term growth and waiting for that pent-up demand … to show back up.”

He added that Occidental Petroleum Corp. said it would remain flexible, saying it could lower growth or let production decline a bit.

Some oilfield service companies, Ozkan continued, are already seeing some rigs being returned due to reduced drilling programs in light of oil price changes.

The moves will impact supply.

“If we do see demand start to come back in the second quarter, we expect that a lot of the plans that operators had in place are likely to continue and even maybe pick up steam later on in the year as prices recover,” Ozkan said. “However, even before we got to the impact of coronavirus on demand, we already had all of these operators collectively shedding about 15%, or $8.8 billion of capex, from 2019 levels, and they were open to further activity reductions should prices deteriorate.”

Demand Uncertainty

The International Energy Agency (IEA) cut its 2020 base case global oil demand forecast by 1.1 million barrels per day (bbl/d). It expects demand will fall year-on-year by 90,000 bbl/d

“In 1Q20, China’s demand falls by 1.8 million bbl/d y-o-y with global demand down 2.5 million bbl/d,” the IEA said in its March 2020 Oil Market Report. “We assume that oil demand returns to close to normal in 2H20.”

The coronavirus is playing a role globally and in China, the epicenter of the virus.

“We think that Chinese oil demand is easily shedding over a million barrels a day in the current quarter,” RS Energy Group Vice President Al Salazar said on the webinar.

The situation appears to be improving in China, according to Salazar, who noted some cities in China have lifted lockdown restrictions, port congestion has fallen and traffic is starting to return to normal.

His comments were based on analysis of data from GPS manufacturer Tom Tom’s Traffic Congestion Index, which assessed traffic in Wuhan and other provinces, and rising gasoline and power consumption.

“But looking beyond China—now, this is the important thing—we estimate total world oil demand this year may grow a modest 600,000 barrels a day because of the impact of the coronavirus,” Salazar said. “This estimate is based on the loss of 1 percentage point in global GDP growth this year compared to the pre-coronavirus case.”

The greatest source of uncertainty, he added, is the global impact on demand, economic activity and the spread of the disease.

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